Tax Reform Bill: A Big Advance

The House of Representatives has finally passed on third reading the first package of the comprehensive tax reform program called TRAIN (which stands for Tax Reform for Acceleration and Inclusion).
Those earnestly advocating TRAIN thought that the bill would be badly compromised. Vested interests inside and outside the House opposed it. Particularly hard to pass were: 1) the expansion of the value-added tax (VAT) base by limiting the exemptions to the essential goods and services and 2) the increase in the excise tax rates of petroleum products, which were artificially low (even a zero tax rate for diesel) and unadjusted for inflation since 1997.

It was reported, for instance, that the House leadership wanted to further water down the key features of the reform like the excise tax on petroleum products and the broader VAT coverage. Even within the Executive, cracks emerged. The Department of Social Work resisted the petroleum excise tax and the VAT expansion. It was likewise against the cash or revenue transfer, which is necessary for the welfare gain of the poor and near poor, and for the mitigation of the moderate price impact resulting from the consumption taxes.

Further, the perception was that President Rodrigo Duterte was not focused on the tax reform, leaving the responsibility of having the bill passed to the economic managers, especially to Finance Secretary Carlos Dominguez.

Some of the harsh critics of Duterte also opposed the reform bill, failing to realize that the reform benefits everyone.

Let it be affirmed that the bill is pro-poor, pro-people. The rewards include 1) income tax relief for the upper middle class, the professionals, and the working class and net welfare gain the poor and near poor through cash transfer; 2) expansion of essential social economic and social services like infrastructure, education and health; and 3) robust high growth and an improved macroeconomic environment, enabling job creation and poverty reduction.

The tiny, richest .01% of the population cannot complain, notwithstanding the higher income tax and the higher excise taxes on gasoline and autos that they have to pay. The outcome of the tax reform will mean better business and investment opportunities for them (and everyone) resulting from infrastructure upgrade, lower interest rates that follow the credit upgrade, and overall economic stability that the reform brings.

At the final reckoning, the reformers prevailed. Here are the main features of the reform package that the House approved:

Those earning P250,000 and below (this including the minimum wage workers) are exempted from paying the income tax.

The 13th month pay and other bonuses that do not exceed P100,000 are exempted from the income tax.

The taxable income levels will be adjusted to inflation every three years. This avoids the “income creep” that leads to higher tax rates for those belonging to lower income brackets.

The estate tax and the donor’s tax are reduced from a prohibitively high of 20% of net estate and 15% of donations to a reasonable six percent for both items.

The bill has removed the VAT exemption for many items but as part of the compromise, has retained the exemption for senior citizens and persons with disabilities, cooperatives, and renewable energy.

The threshold for the application of VAT has been increased from P1.9 million per year to P3 million per year. That means that the VAT will not cover those entities with low sales and those mainly catering to the poor.

The petroleum excise tax will increase on a staggered basis: P3 in the first year, P2 in the second year, and P1 in the third year. However, the rates after the third year will not be automatically adjusted to inflation, again a compromise.

The automobile excise taxes are increased, following a scheduled tax system, which is to say that five different tax rates are applied based on prices.

An excise tax, seen as a sumptuary tax to promote health, is applied on sugar sweetened beverage (SSB) — from P10 per liter for local sugar and P20 per liter for others.

On top of all this, the bill allocates a large part of the additional revenue to be generated from the reform for infrastructure, education, and social protection, including the cash transfers to up to the 50th percentile of the population.

The bill is far from perfect, from the viewpoint of tax reform advocacy.

To name some weaknesses: Some vested interests like the big and rich cooperatives and the wealthy senior citizens are still exempted from the VAT. (The elderly poor hardly benefit from the VAT. Rather, organizations like the Coalition for the Services of the Elderly advocate a universal social pension on lieu of the VAT exemption for the senior citizens.) The bill omits the automatic inflation adjustment for petroleum products. The excise tax on SSB is discriminatory against non-local sugar.

But all told, the bill contains the essential reform features.

The question is, how has the victory come about, despite the odds?

First, the President certified the tax reform bill as urgent.

Credit goes to Finance Secretary Dominguez and Budget Secretary Ben Diokno, not only for convincing the President to certify the bill as urgent but also for stoutly defending the essential features of the bill. Even as they stood firm against the further dilution of the bill, they created incentives for the House leadership and the members of the House to allow the bill’s passage. Yes, my dear, the pork barrel still exists, although constrained and disciplined by past Supreme Court decisions and the reforms undertaken by the former Budget Secretary Butch Abad. This is how pork barrel can save the cause of reforms, something that Abraham Lincoln in the far past taught us.

Second, pressure from civil society and opinion-makers and civil society’s close cooperation with government reformers, particularly with the men and women of the Department of Finance, contributed to the bill’s success. In many cases, the civil society and reform-oriented columnists helped shape the thinking of legislators to favor the reform.

Many responsible groups and individuals, including politicians of varying political or ideological stripes, recognize that the reform transcends politics; that the benefits accrue to the people; and that the gains extend to the future. Thus Vice-President Leni Robredo has consistently expressed support for the reform. Her Liberal Party colleagues in the House like Representatives Gabriel Bordado from Camarines Sur and Jocelyn Limkaichong from Negros Oriental together with independent-minded legislators such as Joey Salceda from Albay and Ramon Rocamora from Siquijor and veteran politicians led by ex-President Gloria Macapagal Arroyo all helped the Chair of the Ways and Means Committee, Representative Dakila Cua from Quirino, in shepherding the bill’s passage. Representative Cua, despite the previous criticisms leveled against him (including from this author), deserves thanks and congratulations.

The hope is that the Senate will follow the House version of TRAIN and even enhance it further.